Media Briefing Note: UK Treasury Announcement Suggests Support for Shale

LONDON, 19 July 2013 - As part of the ongoing assessment of the potential benefits of shale gas development in the UK, the UK Treasury stated today that it intends to propose a tax rate on shale production income of 30 percent, compared with the current 62 percent rate on oil and gas extraction.

The announcement gives developers and potential investors an indication of the level of government support for the development of the UK onshore oil and gas industry.

Colin Graham, Of Council  in Hogan Lovells' Energy group said:

"The market will certainly appreciate the incentive to invest that this announcement brings.

"It will be interesting to see how the market responds in the short term, given the uncertainties that still remain about local community acceptance of shale gas development. Although the UK's environmental legislation is amongst the most robust in the world, concerns have been expressed about the effect on water supply security and water contamination as evidenced by Water UK's press release issued today.  A clear statement from the parliamentary all party working group as to how the lessons of US shale gas development will translate into the more comprehensive policy that will spur real investment in the sector.

"We will also have to wait for further clarity on the position that the EU will take on shale gas development and whether this has any legal effect on developments in the UK. It is uncertain whether the EU will seek to adopt community-wide regulation in this area, and it may be the case that shale gas development will come down to politics and only proceed in some countries. France and Bulgaria have gone for outright bans. Poland's shale sector has certainly been affected by this political uncertainty. On 27 June the European Court of Justice ruled in Case C 569/10 that Warsaw had violated the European Hydrocarbons Directive by allowing licences to be issued for the exploration and extraction of hydrocarbons, without fully open tenders, a move which has affected up to 100 shale gas licences.

The sector in the UK however has been gaining investor confidence recently with the decision in June of Centrica Plc, the largest energy supplier to U.K. households, to buy a 25 percent stake in Cuadrilla Resources Ltd’s permits in northern England. Further legal certainty on the fiscal regime to apply to shale gas development in the UK can only help this."

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